Online retail in India and cash burn

The e-commerce market in India has witnessed tremendous growth over the last decade or so. This phenomenal growth can be attributed to a number of factors.

India currently has an estimated population of 1.33 billion. While over 60% of Urban India uses the Internet, only about 17% of Rural India does so, presenting a massive opportunity for expansion. In 2007 the Internet penetration in India stood at a measly figure of 4% and, a decade later in 2016 it had reached almost 35%. The massive reach of this digital revolution is supported by rising numbers of Internet-enabled phones being adopted by the populace and the telecom operators in the domestic market offering usage plans at disruptive price points as against earlier.

This, combined with rise in consumer wealth, a growing middle class and the higher aspirations from the general mass has triggered a boom period for the e-commerce industry, particularly for online retailing. The possibility to avail products which were hitherto unavailable at your local shop, most of the times at deep discounts than those available in walk-in shops goes a long way to further the preference of the Indian consumer in availing the online retailers’ services. Even regular household consumables and provisions are now available through these portals. And all of it, at a great convenience of delivery at your doorstep!

Due to this surge in popularity of online retailing, even shopping houses and brands who have conventional stores have opened up online stores as well. The Government of India is favouring e-commerce primarily because of the transparency and efficiency it offers, having approved 100% Foreign Direct Investment (FDI) in the sector, and recently launching the “Digital India” campaign.

The initiatives by the Government to promote e-commerce, combined with public knowledge and acceptability of such sales channels, have all led to high hopes for its future in the Indian market. It is now estimated that the total e-commerce industry sector will grow to 120 billion USD and by 2020, growing at a global highest annual rate of 51%, will eventually take the USA’s place as the second largest e-commerce market by 2034.

However, a question hangs over the fate of the online retail business. The most crucial of them is the sustainability of their business model and the cash burn they cause. Many e-commerce firms, conceptualised and founded by ambitious people out to make a change and funded by private and institutional investors, fail to make it big due to lack of innovation and uniqueness in their business models.

Even then, every day many such new firms are set up and the relatively promising ones still continue to attract substantial funding from investors. Often they fail after a stint of unsuccessful operations and are forced to shut shop. The cash being burnt by such firms puts a big question mark on the continuous inflow of investors’ funds.

The top three online retailers in India – Amazon, Flipkart and Snapdeal – have been locked in a battle for supremacy for some time now, mainly after Amazon entered the Indian market in mid- 2013. They still continue to attract funding – Flipkart and Snapdeal from investors and Amazon from its USA based global sales – and their market valuations continue to soar.

On the other hand, their operations are bleeding the companies of cash, and most of this amount appears to be invested towards fighting each other for market share – on advertising, discounts, dealer incentives etc. In fiscal year 2015-16, these three companies together posted losses of Rs 11,754 crore, as against Rs 6031 crore in 2014-15. All three are chasing an elusive “pivotal year”, a time when it can be decisively said that one of them would be a clear winner in this struggle and the others are reduced to minority. However, there is ambiguity regarding the indicator which would decide the victor and the vanquished. While this competition is of benefit to the consumers, as well as to logistics companies and social media and digital marketing agencies, it is unhealthy for the championship contenders, especially when there is no clear trophy at the end.

The question of how much cash will be burnt in the name of gaining supremacy in the online retail space in India remains to be seen.